Regional markets are in for a rebound today, tracking gains in US and Asian markets. But gains are likely to be limited as clients continue to adopt caution ahead of the EU summit which kicks off tomorrow. As such, the focus will be on remarks by EU leaders – later today, Germany’s Angela Merkel will meet with President Francois Hollande ahead of the summit. In terms of data, German inflation, US durable goods orders and pending home sales will all garner attention. Also later, Italy is set to sell EUR9billion bills at an auction.

Ishaq Siddiqi - Market Strategist - ETX Capital

09:00 A.M

With European equity markets having been confined to a rather tight trading range for most of yesterday more of the same is expected at least for the first half of today’s trading session ahead of tomorrow’s start of the anxiously awaited EU Summit.

While traders are keeping a very close eye on any pre-summit comments from politicians attending the summit especially from Chancellor Merkel and President Hollande who are scheduled to meet tonight.

Nobody really expects that at the meeting any major steps will be taken which would finally pave the way for an end to the over two year old European Financial crisis instead some of the focus will also be on any potential measures being agreed on which would boost growth within the Euro-zone.

The problem with the EU meeting is that although expectations are very low for a positive outcome investors are increasingly running out of patience which is putting additional pressure on politicians. Unfortunately it is not all about Germany just agreeing to Eurobonds and everything will be fine but also about important and necessary reforms which need to be implemented by all countries in order to avoid a much more severe crisis in the future.

The question is if politicians indeed have the necessary time available which will be needed in order to negotiate and implement these reforms, however any progress being made towards a more stable and financially viable Euro-zone would certainly be welcomed by investors and bring periphery yields down to more sustainable levels in the long run.

Italy is selling 9 Billion Euros of 6 months T-Bills today, with investors once again expected to demand an extra premium due to uncertainty caused by the European financial crisis and most recently their increasingly under pressure banking sector. There is slight optimism coming out of Asia with investors are becoming increasingly confident that another rate cut by China isn’t too far off, which would not only benefit China but economies around the world and especially Germany who is relying heavily on exports to China.

Later in the day the spotlight will be on the release of US durables goods orders, with a slight increase compared to the previous month expected not quite confirming the recent decline seen in US jobs and consumer confidence figures. If indeed durable goods orders are showing growth worries about a more severe slowdown of the US economy might be mitigated which should give stocks an extra boost.

Markus Huber - Head of German HNW Trading - ETX Capital

01:00 P.M

After yesterday’s losses across most asset classes, the tone in financial markets was calmer today. Stock indices and the euro currency are both steady, albeit rangebound as clients continue to err on the side of caution ahead of the EU summit, which starts tomorrow. US stock futures are currently indicating a flat open on Wall Street – ETX Capital calls the DJIA down 4 points and the S&P 500 up 2 points.

Today’s hesitation to take build positions has largely been driven by upcoming risk-events, with euro zone finance ministers booked for an emergency teleconference to discuss bailout requests from Cyprus and Spain, followed by a Merkel-Hollande summit is scheduled later this evening.

This week, mounting expectations for an under-delivery at the summit have spooked the markets, prompting many to scale back their hopes for an outcome which would pave the way for a united and disciplined euro zone. Germany’s Chancellor Merkel further dashed hopes yesterday, saying common debt liability would not be achieved.

On the opposite end, Italy’s head Mario Monti said he will not back down from his proposal to allow the Eurozone rescue funds to intervene in the Spanish and Italian debt markets and will extend the summit until Sunday if necessary to get a deal done on this point.

As long as divergences remain between nations, there will be no quick solution to the crisis, which in turn will place considerable pressure risk assets like stocks and the euro in the near-term. Today’s limited move to the upside suggests that markets are preparing for disappoint. That said, if leaders can come together and exceed current low-base expectations, risk assets are in for a healthy boost.

So far, data has been rather thin on the ground with the focus largely on a T-bills auction by Italy. The country had to pay a sharply higher rate of interest to sell its six-month T-bills. Italy sold the planned EUR9 billion of short-term paper, but again, yields rose at around 2.95% versus 2.10% at the previous auction in May. Again, the rising yields only serve to remind us that markets remain increasingly sceptical that EU leaders will be able to ink out sustainable solutions later this week.

Ishaq Siddiqi - Market Strategist - ETX Capital

06:00 P.M

Heading into the European close, stocks and oil prices have perked up, while core government bonds have slipped in a sign that clients are taking on more risk compared to earlier in the session.

Gains are underpinned by euro-positive headlines from the EU and strong marco data from the US. The Eurogroup saying the EFSF can provide financial assistance to Spain until the ESM is ready together with it welcoming a bailout request from Cyprus has left clients feeling rather sanguine this afternoon. Although expectations going into the EU summit are low, markets are comforted that measures are being taken by leaders.

The ESM facility should help banks directly, so an agreement on the ESM not only safeguards the banking system, but it also takes some of the pressure currently felt by the ECB to pump more cheap money into the financial system. As such, today’s headlines from the Eurogroup have provided a degree of comfort to clients before the summit kicks off, although Germany’s ongoing resistance to Eurobonds remains a sticking point.

Currently on Wall Street, stocks are firmer thanks to better-than-expected US pending home sales data, which showed a solid 5.9 increase in May after falling by 5.5% in April. The outcome has exceeded market expectations, painting a rosier picture of the US economy compared to recent macro releases. Today’s upbeat report follows a string of data that suggest housing activity is on the path to recovery. Separately today, US durable goods orders rose by a solid 1.1% in May from a downward revised 0.2% decline in April.

Both reports helped to lift prices on Wall Street and in turn have had a hand in helping Europe stock prices. Earlier, Italy smoothly sold EUR9 billion worth of T-bills. Refinancing costs were higher but yields on the secondary market are lower. Markets showed little reaction overall to the auction.

Looking to Thursday’s session, the eagerly awaited two-day EU summit starts in Brussel, and as noted, the market has pared back their expectations for an aggressive response by leaders. For now, headlines due this evening from a dinner meeting between German Chancellor Angela Merkel and French President Francois Hollande will be in the spotlight.

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